Credit card mailing irks OFT

When Marks & Spencer Financial Services mailed 2.6 million of its storecard holders with a replacement credit card, it thought it was well within legal controls on posting ‘credit tokens’. The OFT took a different view, but for different reasons to those generally reported.

Topic: Consumer credit

Who: Marks & Spencer

Where: London

When: October 2003

What happened:

Marks & Spencer Financial Services Plc (MSFS) made a credit assessment of its Marks & Spencer storecard holders. 2.6 million out of the total of 5 million card holders passed the assessment. In a move which, if successful, would catapult the retailer straight into the top ten of Britain's biggest credit card providers they were sent a mailing enclosing, by way of replacement for their existing storecard, the new "& more" Marks & Spencer credit card. The new card, the mailing indicated, would automatically replace the storecard unless the recipient contacted Marks & Spencer to specifically object. One of the attractions of the new card was that it offered a lower rate of interest than the existing storecard.

Given that the Office of Fair Trading had recently announced that it was conducting an informal investigation into misleading marketing of store cards at usurious rates of interest, one might have expected the credit watchdog to have been only too pleased with this initiative on the part of the retailer.

Unfortunately, the opposite was the case.

The OFT took the view that this was a form of inertia selling of which it did not approve. In support of its position it cited Section 51 of the Consumer Credit Act 1974. Section 51 (1) states quite plainly "it is an offence to give a person a credit-token if he has not asked for it".

There can be no doubt that the credit card which was sent to the 2.6 million recipients classified as a "credit token". Section 14(1) of the 1974 Act defines credit token as a "card, check, voucher, coupon, stamp, form, booklet, or other document or thing" given to an individual by a person carrying on a consumer credit business and entitling the recipient to use the token to get cash, goods or services on credit.

It was also quite clear that the recipients had not previously asked to receive the credit card as required by the Act. This can only occur, Section 51(2) of the Act states, if the request is contained in a document signed by the person making the request.

Accordingly, the OFT bore down on MSFS and put pressure on them to change their tack.

MSFS disputed the OFT's position.

It referred to Section 51(3) of the 1974 Consumer Credit Act. This says that it is OK to send a person a credit card which he has not already requested in writing, provided it is either (a) for use under a credit card agreement already made or (b) it is in renewal or replacement of a credit card previously accepted by the recipient under an agreement which continues in force, whether or not varied.

One imagines that MSFS said they were plumb within Section 51(3)(b). There was an existing credit card agreement in place. The "& more" card was being sent by way of replacement of the storecard which had been issued under that agreement. The original agreement was remaining in force subject to some variations, such as the reduction of the APR.

The OFT countered that with a challenge to the term in the original storecard agreement which entitled MSFS, unilaterally, to change any of the terms in the credit agreement whenever it liked.

The OFT said that this clause was unenforceable under the 1999 Unfair Terms in Consumer Contracts Regulations. Under the scheme of the 1999 Regulations the OFT took the view that the provision went further than was necessary to protect the legitimate, commercial interests of MSFS and thus caused significant imbalance in the parties' rights and obligations under the credit contract which was to the detriment of the consumer.

MSFS did not necessarily accept the OFT's views on these matters. However, it decided that discretion was the better part of valour. It gave the OFT undertakings to amend the challenged term so as to limit its applicability and to change their procedures in relation to the new "& more" card. The position from now on will be that "& more" card recipients can continue using their original storecard if they wish, while the "& more" credit card will be usable on an "opt-in" rather than an "opt-out" basis. In other words consumers will have to take positive action to activate the card by contacting MSFS and registering.

Why this matters:

Having recently been castigated by MPs for being limp-wristed in its approach to alleged mis-selling and high interest rates in the storecard sector, the OFT is clearly keen to give a fresh appearance of aggressiveness in this sector. It is interesting to note that none of the reports that marketinglaw has seen of the case draw attention to Section 51(3) of the 1974 Act. This is surprising because on the face of it, it provides the specific exemption which MSFS were no doubt relying on when sending out their mailing. What appears to have made it difficult for them to rely on that exception was the basis on which they were seeking to vary the original storecard agreement. This was ruled by the OFT as unenforceable and unfair because of the 1999 Unfair Terms in Consumer Contracts Regulations.

In essence, therefore, the case was not about mistaken inertia selling of credit cards, but about alleged unfair terms in consumer contracts.